Best Practices in University Proof of Concept Programs

1. Best Practices in University Proof of Concept Programs David N. Allen Associate VP for Technology Transfer University of Colorado System david.allen@cu.edu 303-735 1688

2. Why are We Having this Discussion? • Seed capital - Money used for the initial investment in a start-up company, for proof-of-concept, market research, IP protection or initial product development • US venture capital investing in ‘03 – $18.2B of that $354M into start-up/seed (1.9%) v. 17% in ‘95 • SBIR funding in 2004 ~ $2B; Angels estimated to be 10 to 20X VC seed • Valleys of death exist – continued challenges due to either a lack of external support or lack of commercial viability? • The Nat’l Assoc. of Seed and Venture Capital Funds estimates that 60 universities are undertaking seed investments – from small grants to VC funds.

3. What is Proof of Concept? A Way to Mature Technology • Basic Concept – adding significant value by reducing major risks • Adding value to what end? Preparing the technology to suitably involve the next participant in the value chain • Primary focus on platform or core technologies that are potentially disruptive products • What are the dimensions of value to be added or risks to be reduced?

4. Dimensions of Risk Reduction • Some obvious risks to be reduced: • Unknown commercial strategy or plan • Little known about competition • Unknown market and value proposition • Unknown technology/product configuration • Will it work? • Little business expertise and entrepreneurial driver • Little or no capital to execute plan • Outcome of patent prosecution unknown • All of this and more within an environment of abundant invention opportunities and scarce resources (people, time and money).

5. Technology Maturation • Reliable Information • A credible commercialization or business plan • Verifiable data, translatable validation & meaningful endpoints • Understanding and confidence in the IP protection • Relevant Expertise • Domain relevant serial entrepreneurs • Patient Risk Capital • Capital resources that can be leveraged • Performance • Value added from the previous stage • Good multiplier effects (ratio of internal to external funds) • Presentation • A well constructed story told by a motivated party

6. POC Program Best Practices • Basis of best practice determination • Different approaches used by universities • Informed by private & institutional investing • Analysis broken down by process • Objectives – clarity of purpose • Application process – ease of application and clarity of criteria • Review and selection – objectivity and useful feedback • Management – ensuring return for stakeholders

7. Program Size Continuum • Small programs ($10K to $50K grant) • Work conducted in inventor’s lab • Less emphasis on platform IP, more on licensability • Resources limit larger grants • Return captured in university IP policy allocations • Gift, government or internal tech transfer proceeds • Intermediate programs ($50K to $250K) • Characteristics are a mix of small and large programs • Equity v. grants • Often involvement from state governments and foundations • Large programs ($250K +  investment) • Approaching VC like model - ROI maximization driver • Typically university endowment involvement often with other LPs • Returns typically separate from university IP policy allocation, either to LPs or ‘evergreen’ perspective

8. POC Program Objectives • Resource commitment and deal flow are the two main determinants of program size/scope • Stakeholder needs (objectives) • Technology development, enterprise/economic development, ROI, or all of the above? • Risk tolerance and reward patience • Demonstration of university commitment to tech transfer • Where will the returns be directed? • Horror stories abound – BU’s $90M in Seragen

9. Application Process • Marketing solicitations • Online submission • Clear process for late applications • Prescreen prior to sending to reviewers • Avoid reviewer overload

10. Review and Selection • Timely responses • Investor perspectives and sector specific teams • Market size, impact of money and management capacity • Non-economic criteria (e.g. economic development) • Isolation from political forces • Leverage criteria? • Revisions allowed?

11. Management/Operations • Use of funds • University specific or broader • $ to support PI • Overhead (F&A) rates • Pricing equity v. convertible debt • Conversion rates • Non-conversion payback factors • Co-investing opportunities

12. Background on the University of Colorado (CU) • Three campuses: Boulder, Denver/Health Sciences Center and Colorado Springs • System level TTO provides services to all three campuses. • CU’s total enrollment is 52,351 (of which 13,800 grad). • In FY 2004, CU garnered $588.4 M in research awards, 85% from federal sources with $266.3M awarded by the Department of Health and Human Services. • New Health Sciences Center campus and research park • 18 start-ups in past 3 years, targeting 12 this year; 180 disclosures in FY ‘05 • Projecting ~$20M licensing revenue this FY

13. Dimensions of CU’s POC Program • Purpose: provide funds for technology development to establish/advance commercial viability for promising start-up companies that have licensed CU IP. • Internally funded from TTO endowment and royalty $ • $100K convertible debt investments per start-up. • Business plan, entrepreneur and at least an option needed. • Applications reviewed by two panels of VCs. • 2 application rounds: Fall & Spring – 5 awards • 15 applicants for Fall ’04 round – 2 awards • First $ in; one side by side investment to date

14. CU POCLessons • Provide timely information as to status and outcome • Provide extensive feedback on applications • Existence of the program brings out start-up opportunity • Standardize debt placement agreement • Standardize scoring/rating system for VCs • Clear eligibility/disqualifying criteria • TTO help preparing applications and presentations • Management of stakeholder expectations

15. Programs Reviewed • Boston University Community Technology Fund • Illinois Ventures • The Chancellor Fund (Vanderbilt) • Prologue Ventures (Missouri) • WARF • University of Washington • Los Alamos National Laboratory • (Purdue) Trask Technology Innovation Awards and Trask Pre-Seed Venture Fund

16. Programs Reviewed con’t • Pittsburgh: Life Sciences Greenhouse Pre-Seed/Seed Fund Program, the Technology Development Fund and Innovation Works • The Big Red Venture Fund (Cornell) • Wolverine Fund (Michigan) • Ben Franklin Center in Southeastern Pennsylvania • Maryland Enterprise Fund • Commonwealth Seed Capital (Kentucky) • Yamacraw Program (Georgia) • Centennial Ventures (NCSU) • Technology Innovation Gap Fund (Tulane)